Emerging-market equities rebound, with earnings beating expectations supporting a broadening rally

Overview

This report is Goldman Sachs' EM Weekly Kickstart, focusing on the performance of emerging-market equities amid a sharp rebound in technology stocks, renewed energy shocks, and the ongoing second-quarter earnings season. The report notes that MSCI EM rose approximately 2.1% this week, led by China, India, and South Africa; technology and semiconductor stocks rebounded sharply on Friday, while the Korean market reversed its losses for the week. Although an escalation in the US-Iran conflict and oil-price volatility temporarily weighed on markets, non-tech emerging markets performed relatively steadily, demonstrating resilience supported by low valuations, a low starting point, and earnings.

Core views

Goldman Sachs' core view is that as long as oil-price and interest-rate-related macro volatility remains manageable, the rally in emerging-market equities should continue to broaden from technology into wider regions and sectors. The report remains positive on technology and semiconductor-related segments supported by AI infrastructure profit growth, but also emphasizes that although leveraged positions have declined from their highs, they have not been fully cleared, so short-term volatility may persist. Regionally, the report favors Taiwan and Korea, which have high technology weights, as well as Brazil, South Africa, Hungary, and Greece, where idiosyncratic opportunities exist. By sector, it prefers technology hardware, banks, capital goods, and metals & mining.

Analysis framework

The report forms its strategic view by combining weekly market performance, second-quarter earnings tracking, EPS revisions, valuation percentiles, fund flows, style factors, regional and sector relative performance, as well as Brazil's interest-rate sensitivity and historical performance during election cycles. The analysis focuses not on individual companies but on an integrated allocation framework covering emerging-market equity indices, regional markets, industry sectors, and macro factors.

Methodology notes

• Earnings trackingSecond-quarter earnings-season tracking

  Compare reported-company earnings growth, earnings surprises, and market expectations at the start of the quarter

  The report assesses earnings-season quality using the number of companies reported, market-cap coverage, year-over-year earnings growth, the proportion of earnings beats, and the proportion of sales beats, and uses these measures to determine whether earnings are sufficient to cushion macroeconomic shocks.

• Valuation analysisForward P/E and Z-score

  Use the 10-year historical average and standard deviation to measure the valuation position

  The report notes that MSCI EM trades at approximately 9.7x forward earnings, around 2.4 standard deviations below its 10-year average, while emphasizing that emerging markets still trade at a significant discount to the US and other developed markets.

• Fund-flow analysisForeign flows and GEM fund flows

  Observe cross-border buying and selling and subscriptions and redemptions in global emerging-market funds

  The report uses foreign inflows and outflows, active and passive fund flows, and the degree of mutual-fund underweighting in emerging markets to assess liquidity and positioning.

• Allocation frameworkRegional diversification and sector overweights

  Seek broadening opportunities in emerging markets beyond technology

  Using the performance of non-tech emerging-market regions during previous TMT drawdowns, the resilience of equal-weighted indices, and market-breadth indicators, the report supports broadening from technology into non-tech markets such as LatAm, South Africa, and ASEAN.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• MSCI EM (MXEF)

  Core covered index

  Strengths

  Upward earnings revisions, low valuations, a significant discount to developed markets, and strengthening weekly performance.

  Weaknesses

  Market breadth remains narrow, fund flows are under short-term pressure, and the technology weighting adds volatility.

  Comparison

  Valuations are lower than in the US and major developed markets; the equal-weighted emerging-market index shows greater resilience in non-tech sectors.

  Risks

  Oil-price shocks, renewed interest-rate repricing, escalating geopolitical conflict, and continued foreign outflows.

• EM Tech / Semiconductors

  Primary rebound driver and core overweight direction

  Strengths

  Strong profit growth related to AI infrastructure and significant second-quarter earnings beats among North Asian technology companies.

  Weaknesses

  Leveraged positions have declined but have not been fully cleared, so short-term volatility may persist.

  Comparison

  Technology remains an important source of upward earnings revisions, but the report also emphasizes that the rally needs to broaden into non-tech sectors.

  Risks

  Position deleveraging, valuation volatility, a global TMT drawdown, and crowded AI trades.

• Non-tech emerging-market equities

  Potential beneficiaries of broadening

  Strengths

  Relatively mild reaction to the recent energy shock, with low valuations and low price starting points.

  Weaknesses

  Earnings in some regions remain slightly below expectations, and markets are sensitive to oil prices and local interest rates.

  Comparison

  During previous US TMT drawdowns, non-tech regions such as LatAm, South Africa, and ASEAN outperformed North Asia and MSCI EM overall.

  Risks

  Higher energy prices, a stronger dollar, and deteriorating fund flows.

• Brazil equities

  Idiosyncratic regional opportunity

  Strengths

  Sensitive to declines in local interest rates; historically, equities and rate-sensitive sectors have performed well during easing cycles.

  Weaknesses

  The election cycle may increase volatility, while macroeconomic and fiscal uncertainty remains.

  Comparison

  Domestic cyclical and rate-sensitive sectors have typically outperformed the broader market by approximately 2–3x during historical periods of falling interest rates.

  Risks

  Brazilian election volatility, an interest-rate path falling short of expectations, and a reversal in foreign flows.

• Taiwan and Korea

  Preferred markets with high technology weights

  Strengths

  Beneficiaries of earnings growth in technology hardware, semiconductors, and AI infrastructure.

  Weaknesses

  Sensitive to the technology cycle and positioning changes, with significant recent volatility.

  Comparison

  Goldman Sachs maintains its overweight preference but also emphasizes the need for regional diversification.

  Risks

  A technology-stock drawdown, foreign outflows, and declining global risk appetite.

• South Africa, Hungary and Greece

  Regional diversification and idiosyncratic allocation directions

  Strengths

  Provide regional diversification benefits, with some markets supported by interest-rate, banking, or mining themes.

  Weaknesses

  Relatively high liquidity, policy, and local macroeconomic constraints.

  Comparison

  Their lower correlation with North Asian technology markets makes them suitable for broadening emerging-market portfolios.

  Risks

  Local interest rates, political risk, commodity-price volatility, and changes in the European macroeconomic environment.

Key data

• MSCI EM weekly performance+2.1% w/wDriven mainly by China (+4%), India (+3%), and South Africa (+2%).
• MSCI EM forward P/E9.7x fwd P/EApproximately 2.4 standard deviations below the 10-year average.
• EM 2026E EPS weekly revision+1.1% w/wEarnings expectations continued to be revised upward.
• Second-quarter earnings tracking85% yoy vs 64% expectedMore than 250 companies, representing approximately half of emerging-market capitalization, have reported, with earnings stronger than expected at the start of the quarter.
• Second-quarter earnings surprises45% beat vs 34% missedThe proportion of companies beating earnings expectations exceeded the proportion missing them; for sales, the figures were 41% beat vs 11% missed.
• Foreign flows-US$1.1bnKorea received approximately US$0.5bn of inflows, India approximately US$0.4bn, while Taiwan saw approximately US$2.6bn of outflows.
• MSCI EM 2026E earnings revisionsUp approximately 4% since JuneDriven by North Asia, CEE, parts of LatAm, and sectors including industrials, technology hardware, and energy.

Impact & implications

The report's investment implications are positive: emerging markets remain affected in the short term by oil prices, interest rates, and the unwinding of technology positions, but lower valuations, upward earnings revisions, and demand for regional diversification provide support. Technology and AI-infrastructure-related sectors remain fundamentally attractive, but the relative resilience of non-tech markets means investors can look for broadening opportunities in Brazil, South Africa, ASEAN, LatAm, and parts of CEEMEA. Weaker short-term fund flows are a constraint, but global funds remain significantly underweight emerging markets, leaving room for potential reallocation if macro volatility eases.

Risks

• A renewed escalation in oil prices and energy shocks could weigh on oil-sensitive emerging markets.
• An escalation in the US-Iran conflict or other geopolitical risks could trigger a pullback in risk assets.
• Renewed interest-rate repricing could weaken the performance of rate-sensitive markets such as Brazil and South Africa.
• Technology and AI-related positions have not been fully cleared, so semiconductor and technology stocks may remain highly volatile.
• If recent outflows from foreign and GEM funds continue, they could limit market upside.
• Earnings tracking in some regions, such as EM Europe and LatAm, is slightly below expectations and could weigh on the broadening rally.

What to watch

• Whether small-cap companies continue to beat earnings expectations in subsequent second-quarter releases.
• Whether MSCI EM 2026/2027 EPS revisions can continue to rise.
• Whether oil prices, the dollar, and global interest rates remain manageable.
• Changes in foreign flows to Korea, Taiwan, India, and Brazil.
• Whether EM market breadth improves and whether equal-weighted indices can continue to outperform or maintain their resilience.
• Brazilian rate-cut expectations, changes in five-year rates, and volatility ahead of the election.
• Whether GEM active and passive fund flows shift from recent outflows back to inflows.